Now’s the time: Reduce the negative list and revise the Constitution

Dindo Manhit, President of the Stratbase-Albert del Rosario Institute (ADRi) for Strategic and International Studies

President Duterte’s team has declared that it intends to lift constitutional restrictions on economic activity and open the economy to foreign investors. This is welcome news for business and consumers, who have long clamored for the same.

The empirical literature has extolled the merits of foreign direct investment (FDI) as a potent factor for boosting economic growth. The implications of higher FDI are manifold — the entry of foreign players fosters more competition, pumps in more capital, facilitates technology transfers, generates more jobs, and provides consumers with a wider range of choices.

THE TIME IS RIGHT TO TAKE THIS STEP

When he was still Speaker of the House, Rep. Feliciano Belmonte pushed for a resolution to lift the restrictive economic provisions. It failed to take off due to lack of support in Congress. The tone has since reversed, with a stronger and more cohesive political dynamic in the Executive and Legislative bodies. Last month, the House Committee on Constitutional Amendments endorsed a resolution for a Constituent Assembly to facilitate the revision of the 1987 Constitution.

CONSTITUTIONAL AMENDMENTS AND THE FOREIGN INVESTMENT ACT

At present, the 1987 Constitution caps off foreign ownership in crucial and strategic sectors, such natural resources and public utilities, to 40%. This partly explains why the country’s FDI pales in comparison with parallel economies in the region. In 2015, the country’s FDI amounted to $5.7 billion, a 1.5% drop from 2014. Meanwhile, Vietnam’s FDI is double that of the Philippines’, and grew by 28% in the same period.

The Foreign Investment Act of 1991 liberalized the entry of foreign investment, allowing 100% foreign equity with the exception of sectors listed under two negative lists — the first list limits foreign ownership by mandate of the Constitution or specific laws; the second restricts defense-related activities and enterprises which could pose health risks. The lists are reassessed periodically. Ten lists have been issued since 1991, but only a few liberalizations — in casino, retail trade, lending firms, and financial companies — have been made. The latest list, from 2015, is due for review in May next year.

Duterte’s economic managers have reiterated that the negative list will be “relaxed as far as constitutionally possible,” opening all sectors of the economy to foreign investors, save for land ownership. While this is a step in the right direction, most restrictions are still rooted in the Constitution; amending it will be necessary for the economy to truly liberalize.

INFRASTRUCTURE

Despite posting one of the highest growth rates in Asia, the Philippines still faces significant gaps in infrastructure.

In the latest Global Competitiveness Report, the country ranked 95th out of 138 countries in the Infrastructure pillar, lagging behind its ASEAN counterparts. In the same survey, infrastructure was also cited as one of the 5 most problematic factors for doing business in the Philippines. The country’s paltry investment figure could be partly traced to weak infrastructure, although ironically, the lack of investment in the sector could also be attributed to foreign equity restrictions.

The new administration has vowed to embark on a lofty infrastructure spending program, investing P8.2 trillion over its 6-year term.

In 2017, infrastructure spending is pegged at 5.4% of GDP, with planned projects scattered across the regions to diffuse growth into the countryside. To fill the infrastructure gap, the PPP program will be enhanced and its processes expedited.

However, foreign investment restrictions on public utilities significantly limit the quality and quantity of PPP bidders. Lifting this will be crucial, as the country needs investments from better-capitalized companies, with more specialized technologies and more extensive experience in handling mega-infrastructure.

AGRICULTURE

Agriculture Secretary Piñol has waxed lyrical about revolutionizing the agriculture sector to raise rural productivity and Budget Secretary Diokno has said that the sector will be a major beneficiary of liberalization. Agriculture employs 30% of the country’s labor force, but only contributes roughly 10% to GDP.

In the first half of the year, agriculture-driven growth plunged to 3.2%, officially because of weather-related occurrences. The previous administration’s inability to effectively implement sound agricultural policies and its underinvestment in rural infrastructure has severely hampered the sector’s growth.

A PIDS study revealed the significance of rural infrastructure, particularly electricity and roads, in boosting the sector’s productivity. A more productive agriculture sector precipitates higher wages, lower food prices, and ultimately, reduces poverty rates. However, foreign investment in the sector has been scant, due to restrictions on public utilities (think farm-to-market roads). Should these restrictions be eased, agriculture will benefit from the inflow of technical expertise and resources.

FOSTER STRONGER PARTNERSHIPS

The Philippines was recently named in the World Investment Report as one of the top 15 preferred investment destinations within the next 3 years. The new administration has shown its willingness to initiate steps to improve the investment climate; measures are in the works to streamline business processes, boost investments in infrastructure, and liberalize the economy.

To take advantage of a flourishing global interest towards Asian economies, reforms must be implemented soon, lest the country miss out on benefits borne by fostering stronger partnerships with the ASEAN community and the rest of the world. More importantly, to sustain its growth momentum, the country must welcome the entry of foreign investors to provide the necessary technology and expertise in critical areas of the economy.